What President Trump's budget would mean for student loans

The president's budget proposal shows how the White House hopes to reform the federal student loan program.

Author:
Shen Lu, MagnifyMoney

Published:03/02/18

There has been a lot of buzz around President Donald Trump's $4.4 trillion budget proposal outlining steep spending cuts to domestic programs, including the federal student loan program since it was unveiled Monday.

If you are a student loan borrower, rest assured that this budget won't cause changes - at least not directly. Experts interviewed by MagnifyMoney all said the proposal barely means anything to student loan borrowers or prospective borrowers because Congress may completely ignore it, as it did last year and many years in the past.

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"The president's budget in general is just a proposal and messaging document," said Josh Gordon, policy director at The Concord Coalition, a national nonpartisan fiscal advocacy group. "And it doesn't have the force of law. It doesn't get voted on in its entirety."

However, the proposal does allude to the White House hoping to reform the federal student loan program.

Trump's blueprint would streamline income-based loan repayment plans, eliminate the Public Service Loan Forgiveness Program and scrap subsidized loans. These policies would save roughly $203 billion over 10 years. While the savings amount is larger than what Trump recommended in last year's proposal, the proposed policy changes stay largely unchanged from last year's, which Congress did not act on.

"The chances of it being acted as written I would say if it's not zero, it's close," Marc Goldwein, head of policy at Committee for a Responsible Federal Budget, an independent, non-profit, bipartisan public policy organization based in Washington, D.C., told MagnifyMoney. "But I could see pieces of it passing, particularly if there's a broader higher education bill or some kind of deficit reduction bill in the next couple of years."

What to know about Trump's proposal

Trump proposed changing student loan policies that would apply to loans originated on or after July 1, 2019. Those who are borrowing now wouldn't be affected.

Here are three pieces of major policy change recommendations:

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1. Simplify income-driven repayment programs

The new budget plan would collapse income-driven repayment plans - monthly student loan payment calculated based on income and family size - into one, under which student loan borrowers would pay 12.5 percent of their monthly income toward student loans. Borrowers in general pay 10 percent under current plans.

Borrowers may have their remaining balance forgiven after 15 years if their loans covered undergraduate education. But those who borrow for graduate-level studies would have to make 30 years of payments before their balance can be forgiven. Under current law, loan forgiveness for private-sector employees kicks in after 20 or 25 years.

2. Eliminate subsidized loans

Subsidized loans are need-based undergraduate loans that the government pays interest while the student is enrolled at least half time or while the loan is in its grace period or deferment. After that, the borrower starts paying interest. Unsubsidized loans, on the other hand, accrue interest while the student is in school, in grace or in deferment, and the borrower is responsible for repaying all of it.

3. End the Public Service Loan Forgiveness program

As an incentive to encourage students to work in the public sector, government employees or those working for qualified nonprofit organizations may have their loan balance forgiven after 120 on-time payments (which takes a minimum of 10 years). Trump suggested ending this program.

Goldwein said the fact that Congress didn't act on any of Trump's last budget recommendations about student loans convinces him that not much is going to change this year either.

Where is his proposal headed?

Goldwein explained that when the president puts forward a budget proposal, it's just a policy statement that provides a sense of the president's priorities. And there's not usually an effort in Congress to actually enact large parts of it: It either ignores the proposal entirely or picks up pieces of it.

Gordon said this year is even less likely for Congress to act on any presidential proposal because before Trump unveiled his proposal, Congress passed a budget deal that raised spending caps over the course of the next two years.

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The fact that 2018 is an election year also makes it less likely that the Senate and the House will try to pass a budget that they can agree on.

"That would be a very difficult political vote, and it seems like they are going to try to avoid that," Gordon said.

Goldwein said a future Congress may enact some of the president's recommendations, but it's unclear when and how.

So what can student loan borrowers do?

Goldwein cautions future borrowers that college costs will likely continue to rise and at the same time, the government will likely have less money to subsidize higher education.

This is in part because the country's debt keeps rising while its population ages. Therefore, a bigger share of the federal budget is set to go to interest payments and entitlement programs for seniors, Goldwein explained. Meanwhile, revenue will decrease due to massive tax cuts. On top of that, the Federal Reserve will likely keep increasing its short-term interest rates, and so student loan interest rates will tick up.

"If their interest is in it, they should ask their member of Congress of that they think or what they think about this proposal, how they would change it and what it would mean for their constituency," Gordon said. "I think that dialogue with their representative is important."

MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.